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MHK > SEC Filings for MHK > Form 10-Q on 7-Aug-2013All Recent SEC Filings

Show all filings for MOHAWK INDUSTRIES INC

Form 10-Q for MOHAWK INDUSTRIES INC


7-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

The Company is the world's largest flooring manufacturer. The Company is the largest manufacturer of ceramic tile and the second largest carpet and rug manufacturer, as well as a leading producer of laminate flooring in Europe and the U.S. The Company continues to expand its international presence in Australia, Brazil, China, France, India, Malaysia, Mexico and Russia through acquisitions and internal expansion. The Company had annual net sales in 2012 of $5.8 billion.

In connection with the Marazzi acquisition, the Company revised the names of its segments and, beginning in the second quarter of 2013, now refers to the Mohawk segment as the Carpet segment, the Dal-Tile segment as the Ceramic segment and the Unilin segment as the Laminate and Wood segment. Only the names of the segments are affected by the change and therefore no prior period financial information changed.

The Company has three reporting segments: the Carpet segment, the Ceramic segment and the Laminate and Wood segment. The Carpet segment designs, manufactures, sources, distributes and markets its floor covering product lines, which principally include carpets, modular carpet tiles, rugs, mats and carpet pads, primarily in North America through its network of regional distribution centers and satellite warehouses using Company-operated trucks, common carriers or rail transportation. This segment's product lines are sold through various selling channels, which include independent floor covering retailers, home centers, mass merchandisers, department stores, commercial dealers and commercial end users. The Ceramic segment designs, manufactures, sources, distributes and markets a broad line of ceramic tile, porcelain tile, natural stone and other products, primarily in North America, Europe, and Russia. This segment's product lines are sold to various selling channels including independent distributors, home center retailers, tile and flooring retailers and contractors. The Laminate and Wood segment designs, manufactures, sources, licenses, distributes and markets laminate and hardwood flooring, roofing systems, insulation panels and other wood products, primarily in Europe and North America. This segment's product lines are sold through various selling channels including retailers, independent distributors and home centers.

In 2011, the primary categories of the U.S. floor covering industry, based on sales dollars, were carpet and rug (53%), resilient and rubber (14%), ceramic tile (12%), hardwood (10%), stone (6%) and laminate (5%). Each of these categories is influenced by the average selling price per square foot, the residential builder and homeowner remodeling markets, housing starts and housing resales, average house size and home ownership. In addition, the level of sales in the floor covering industry, both in the U.S. and Europe, is influenced by consumer confidence, spending for durable goods, interest rates and availability of credit, turnover in housing, the condition of the residential and commercial construction industries and the overall strength of the economy.

For the three months ended June 29, 2013, net earnings attributable to the Company were $84.6 million, or diluted earnings per share ("EPS") of $1.16, compared to the net earnings attributable to the Company of $73.2 million, or diluted EPS of $1.06, for the three months ended June 30, 2012. The increase in EPS was primarily attributable to the Marazzi, Pergo and Spano acquisitions, higher legacy sales volume, increased operations productivity, the favorable net impact of price and product mix and lower amortization expense, partially offset by higher restructuring, acquisition and integration-related costs, inventory step-up related to the Marazzi acquisition, higher input costs and higher interest expense.

For the six months ended June 29, 2013, net earnings attributable to the Company were $135.1 million, or diluted earnings per share ("EPS") of $1.89, compared to the net earnings attributable to the Company of $113.6 million, or diluted EPS of $1.64, for the six months ended June 30, 2012. The increase in EPS was primarily attributable to the Marazzi, Pergo and Spano acquisitions, increased operations productivity, the favorable net impact of price and product mix, lower amortization expense and higher legacy sales volume, partially offset by higher restructuring, acquisition and integration-related costs, inventory step-up related to the Marazzi acquisition and higher input costs. Recent Acquisitions
On January 10, 2013, the Company completed its purchase of Pergo, a leading manufacturer of laminate flooring in the U.S. and the Nordic countries. The total value of the acquisition was approximately $150 million. Pergo complements the Company's specialty distribution network in the U.S., leverages its geographic position in Europe, expands its geographic reach to the Nordic countries and India and enhances its patent portfolio. The acquisition's results and a preliminary purchase price allocation are included in the condensed consolidated financial statements as of March 30, 2013.
On April 3, 2013, the Company completed the acquisition of Marazzi, a global manufacturer, distributor and marketer of ceramic tile. The total value of the acquisition was approximately $1.5 billion. The Marazzi acquisition makes the Company a global leader in ceramic tile. The addition of Marazzi will allow the Company to expand its U.S. distribution,


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source ceramic tile from a worldwide base, and provide industry leading innovation and design to all of its global ceramic customers. The acquisition will provide opportunities to improve performance by leveraging best practices, operational expertise, product innovation and manufacturing assets across the enterprise. The acquisition's results and a preliminary purchase price allocation are included in the condensed consolidated financial statements as of June 29, 2013.
On May 3, 2013, the Company completed the acquisition of Spano, a Belgian panel board manufacturer. The total value of the acquisition was approximately $160 million. Spano extends the Laminate and Wood segment's customer base into new channels of distribution and adds technical expertise and product knowledge which we can leverage. The synergies between the Laminate and Wood segment and Spano create opportunities to optimize manufacturing assets and processes, raw materials and operational efficiencies. The acquisition's results and a preliminary purchase price allocation are included in the condensed consolidated financial statements as of June 29, 2013.

Results of Operations

Quarter Ended June 29, 2013, as Compared with Quarter Ended June 30, 2012

Net sales

Net sales for the three months ended June 29, 2013 were $1,976.3 million, reflecting an increase of $506.5 million, or 34.5%, from the $1,469.8 million reported for the three months ended June 30, 2012. The increase was primarily driven by higher volume of approximately $477 million mainly attributable to the Marazzi, Pergo and Spano acquisitions, the favorable net impact of price and product mix of approximately $22 million and the impact of favorable foreign exchange rates of approximately $7 million.

Carpet segment-Net sales increased $36.4 million, or 5.0%, to $770.9 million for the three months ended June 29, 2013, compared to $734.5 million for the three months ended June 30, 2012. The increase was primarily driven by the favorable net impact of price and product mix of approximately $21 million and higher volume of approximately $15 million. The higher volume was primarily attributable to improvements in the residential specialty and home center channels, as well as the commercial hospitality, corporate and healthcare channels.

Ceramic segment-Net sales increased $355.9 million, or 88.0%, to $760.2 million for the three months ended June 29, 2013, compared to $404.3 million for the three months ended June 30, 2012. The increase was primarily driven by higher volume of approximately $351 million, the favorable net impact of price and product mix of approximately $3 million and the impact of favorable foreign exchange rates of approximately $2 million. Of the $351 million in volume increases, $310 million was attributable to the Marazzi acquisition. The remaining volume increases were led by strong residential channel growth along with continued improvement in the commercial channel and expansion of the Mexican market.

Laminate and Wood segment-Net sales increased $116.6 million, or 32.9%, to $471.0 million for the three months ended June 29, 2013, compared to $354.4 million for the three months ended June 30, 2012. The increase was primarily driven by higher volume of approximately $113 million and the impact of favorable foreign exchange rates of approximately $5 million, partially offset by the unfavorable net impact of price and product mix of approximately $2 million. Of the $113 million increase in volume, approximately $105 million was attributable to the Pergo and Spano acquisitions.

Gross profit

Gross profit for the three months ended June 29, 2013 was $514.1 million (26.0% of net sales), an increase of $125.6 million or 32.3%, compared to gross profit of $388.5 million (26.4% of net sales) for the three months ended June 30, 2012. The increase in gross profit dollars was primarily attributable to higher sales volume of approximately $152 million that is mainly attributable to the acquisitions, operations productivity of approximately $22 million and the favorable net impact of price and product mix of approximately $14 million, partially offset by higher input costs of approximately $30 million, inventory step-up related to the Marazzi acquisition of approximately $19 million and higher restructuring, acquisition and integration-related costs of approximately $8 million,

Selling, general and administrative expenses

Selling, general and administrative expenses for the three months ended June 29, 2013 were $380.9 million (19.3% of net sales), compared to $280.7 million (19.1% of net sales) for the three months ended June 30, 2012. As a percentage of net sales, selling, general and administrative expenses remained relatively flat. The increase in selling, general and administrative expenses in dollars was primarily driven by acquisition volume, partially offset by lower amortization costs.


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Operating income

Operating income for the three months ended June 29, 2013 was $133.2 million (6.7% of net sales) reflecting an increase of $25.5 million, or 23.7%, compared to operating income of $107.7 million (7.3% of net sales) for the three months ended June 30, 2012. The increase in operating income was primarily driven by sales volume of approximately $74 million that is primarily attributable to the acquisitions, increases in operations productivity of approximately $22 million, the favorable net impact of price and product mix of approximately $14 million, lower amortization expense of approximately $10 million, partially offset by higher input costs of approximately $30 million, higher restructuring, acquisition and integration-related costs of approximately $33 million and inventory step-up related to the Marazzi acquisition of approximately $19 million.

Carpet segment-Operating income was $54.9 million (7.1% of segment net sales) for the three months ended June 29, 2013 reflecting an increase of $17.7 million compared to operating income of $37.1 million (5.1% of segment net sales) for the three months ended June 30, 2012. The increase in operating income was primarily attributable to the favorable net impact of price and product mix of approximately $16 million, operations productivity of approximately $11 million, lower restructuring costs of approximately $7 million and higher sales volume of approximately $6 million, partially offset by higher input costs of approximately $21 million.

Ceramic segment-Operating income including restructuring, acquisition and integration-related costs was $46.3 million (6.1% of segment net sales) for the three months ended June 29, 2013 reflecting an increase of $9.9 million compared to operating income of $36.4 million (9.0% of segment net sales) for the three months ended June 30, 2012. The increase in operating income was primarily driven by volume increases of approximately $61 million that are mainly attributable to the Marazzi acquisition and operations productivity of approximately $4 million, partially offset by higher restructuring and integration-related costs of approximately $23 million, inventory step-up related to the Marazzi acquisition of approximately $19 million and increases in input costs of approximately $4 million.

Laminate and Wood segment-Operating income including restructuring and integration-related costs was $41.4 million (8.8% of segment net sales) for the three months ended June 29, 2013 reflecting an increase of $0.8 million compared to operating income of $40.6 million (11.4% of segment net sales) for the three months ended June 30, 2012. The increase in operating income was primarily driven by lower amortization expense of approximately $10 million, higher sales volume of approximately $8 million mainly attributable to the Pergo and Spano acquisitions and increases in operations productivity of approximately $7 million, partially offset by higher restructuring and integration-related costs of approximately $17 million, higher input costs of approximately $5 million and the unfavorable net impact of price and product mix of approximately $4 million.

Interest expense

Interest expense was $25.3 million for the three months ended June 29, 2013, reflecting an increase of $6.5 million compared to interest expense of $18.8 million for the three months ended June 30, 2012. The increase was primarily due to interest associated with the 3.85% Senior Notes issued in contemplation of the Marazzi acquisition.

Other expense (income)

Other income was $1.1 million for the three months ended June 29, 2013, reflecting a favorable change of $1.5 million compared to other expense of $0.4 million for the three months ended June 30, 2012.

Income tax expense

For the three months ended June 29, 2013, the Company recorded income tax expense of $23.2 million on earnings from continuing operations before income taxes of $109.0 million for an effective tax rate of 21.3%, as compared to an income tax expense of $15.2 million on earnings from continuing operations before income taxes of $88.4 million, for an effective tax rate of 17.2% for the three months ended June 30, 2012. The difference in the effective tax rate for the comparative period is due to the Pergo, Marazzi and Spano acquisitions and the geographical dispersion of earnings and losses for the period.


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Six Months Ended June 29, 2013, as Compared with Six Months Ended June 30, 2012

Net sales

Net sales for the six months ended June 29, 2013 were $3,463.1 million, reflecting an increase of $584.3 million, or 20.3%, from the $2,878.8 million reported for the six months ended June 30, 2012. The increase was primarily driven by higher volume of approximately $527 million mainly attributable to the Marazzi, Pergo and Spano acquisitions, the favorable net impact of price and product mix of approximately $48 million and the impact of favorable foreign exchange rates of approximately $9 million.

Carpet segment-Net sales increased $31.8 million, or 2.2%, to $1,466.2 million for the six months ended June 29, 2013, compared to $1,434.4 million for the six months ended June 30, 2012. The increase was primarily driven by the favorable net impact of price and product mix of approximately $44 million, partially offset by lower volume of approximately $12 million. The lower volume was primarily attributable to the timing of carpet product transitions in the home center channel and lower demand for rug products in the mass merchandise channel.

Ceramic segment-Net sales increased $374.8 million, or 47.0%, to $1,172.0 million for the six months ended June 29, 2013, compared to $797.2 million for the six months ended June 30, 2012. The increase was primarily driven by higher volume of approximately $364 million, the favorable net impact of price and product mix of approximately $9 million and the impact of favorable foreign exchange rates of approximately $2 million. Of the $364 million in volume increases, $310 million was attributable to the Marazzi acquisition. The remaining volume increases were led by strong residential channel growth along with continued improvement in the commercial channel and expansion of the Mexican market.

Laminate and Wood segment-Net sales increased $183.7 million, or 26.5%, to $875.5 million for the six months ended June 29, 2013, compared to $691.8 million for the six months ended June 30, 2012. The increase was primarily driven by higher volume of approximately $181 million and the impact of favorable foreign exchange rates of approximately $7 million, partially offset by the unfavorable net impact of price and product mix of approximately $5 million. Of the $181 million increase in volume, approximately $175 million was attributable to the Pergo and Spano acquisitions.

Gross profit

Gross profit for the six months ended June 29, 2013 was $891.1 million (25.7% of net sales), an increase of $143.2 million or 19.2%, compared to gross profit of $747.9 million (26.0% of net sales) for the six months ended June 30, 2012. The increase in gross profit dollars was primarily attributable to higher sales volume of approximately $160 million that is primarily attributable to the acquisitions, operations productivity of approximately $31 million and the favorable net impact of price and product mix of approximately $19 million, partially offset by higher input costs of approximately $33 million and inventory step-up related to the Marazzi acquisition of approximately $19 million and higher restructuring, acquisition and integration-related costs of approximately $11 million,

Selling, general and administrative expenses

Selling, general and administrative expenses for the six months ended June 29, 2013 were $671.1 million (19.4% of net sales), compared to $568.2 million (19.7% of net sales) for the six months ended June 30, 2012. As a percentage of net sales, selling, general and administrative expenses decreased 30 basis points. The increase in selling, general and administrative expenses in dollars was primarily driven by acquisition volume, partially offset by lower amortization costs.

Operating income

Operating income for the six months ended June 29, 2013 was $220.0 million (6.4% of net sales) reflecting an increase of $40.3 million, or 22.5%, compared to operating income of $179.7 million (6.2% of net sales) for the six months ended June 30, 2012. The increase in operating income was primarily driven by sales volume of approximately $73 million that is primarily attributable to the acquisitions, increases in operations productivity of approximately $31 million, lower amortization expense of approximately $21 million and the favorable net impact of price and product mix of approximately $19 million, partially offset by higher restructuring, acquisition and integration-related costs of approximately $43 million, inventory step-up related to the Marazzi acquisition of approximately $19 million and higher input costs of approximately $33 million.

Carpet segment-Operating income was $80.1 million (5.5% of segment net sales) for the six months ended June 29, 2013 reflecting an increase of $17.7 million compared to operating income of $62.4 million (4.4% of segment net sales) for the


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six months ended June 30, 2012. The increase in operating income was primarily attributable to the favorable net impact of price and product mix of approximately $21 million and operations productivity of approximately $15 million, partially offset by higher input costs of approximately $19 million.

Ceramic segment-Operating income including restructuring, acquisition and integration-related costs was $76.3 million (6.5% of segment net sales) for the six months ended June 29, 2013 reflecting an increase of $13.8 million compared to operating income of $62.5 million (7.8% of segment net sales) for the six months ended June 30, 2012. The increase in operating income was primarily driven by volume increases of approximately $64 million that are mainly attributable to the Marazzi acquisition and operations productivity of approximately $7 million, partially offset by inventory step-up related to the Marazzi acquisition of approximately $19 million, higher restructuring and integration-related costs of approximately $24 million and higher input costs of approximately $9 million.

Laminate and Wood segment-Operating income including restructuring and integration-related costs was $80.1 million (9.1% of segment net sales) for the six months ended June 29, 2013 reflecting an increase of $12.3 million compared to operating income of $67.7 million (9.8% of segment net sales) for the six months ended June 30, 2012. The increase in operating income was primarily driven by lower amortization expense of approximately $21 million, higher sales volume of approximately $12 million mainly attributable to the Pergo and Spano acquisitions and increases in operations productivity of approximately $9 million, partially offset by higher restructuring and integration-related costs of approximately $20 million, the unfavorable net impact of price and product mix of approximately $7 million and higher input costs of approximately $5 million.

Interest expense

Interest expense was $44.5 million for the six months ended June 29, 2013, reflecting an increase of $3.1 million compared to interest expense of $41.3 million for the six months ended June 30, 2012. The increase was primarily due to interest associated with the 3.85% Senior Notes issued in contemplation of the Marazzi acquisition, partially offset by lower interest rates on the Company's outstanding debt attributable to the shift from the higher interest rate senior 7.20% notes to the Senior Credit Facility.

Other expense (income)

Other expense was $5.3 million for the six months ended June 29, 2013, reflecting an increase of $6.7 million compared to other income of $1.4 million for the six months ended June 30, 2012. The change was primarily attributable to the net change in foreign currency gains/losses of approximately $9.7 million.

Income tax expense

For the six months ended June 29, 2013, the Company recorded income tax expense of $34.0 million on earnings from continuing operations before income taxes of $170.3 million for an effective tax rate of 20.0%, as compared to an income tax expense of $25.5 million on earnings from continuing operations before income taxes of $139.7 million, resulting in an effective tax rate of 18.3% for the six months ended June 30, 2012. The difference in the effective tax rate for the comparative period is due to the Pergo, Marazzi and Spano acquisitions and the geographical dispersion of earnings and losses for the period.

Liquidity and Capital Resources

The Company's primary capital requirements are for working capital, capital expenditures and acquisitions. The Company's capital needs are met primarily through a combination of internally generated funds, bank credit lines, term and senior notes and credit terms from suppliers.

Net cash provided by operating activities in the first six months of 2013 was $113.9 million, compared to net cash provided by operating activities of $95.6 million in the first six months of 2012. The increase was primarily attributable to higher earnings.

Net cash used in investing activities in the first six months of 2013 was $595.6 million compared to net cash used in investing activities of $94.7 million in the first six months of 2012. The increase was primarily attributable to acquisitions of $449.5 million and capital expenditures of $146.1 million. Capital spending during the remainder of 2013, including capital expenditure requirements related to our recent acquisitions, is expected to range from approximately $235 million to $245


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million and is intended to be used primarily to purchase equipment, add geographic capacity and to streamline manufacturing capabilities.

Net cash provided by financing activities in the first six months of 2013 was $207.6 million compared to net cash provided by financing activities of $13.2 million in the first six months of 2012. The increase was primarily attributable to the proceeds from the 3.85% Senior Notes and proceeds from the senior credit facility used to fund the Marazzi acquisition which closed on April 3, 2013.

On July 8, 2011, the Company entered into a five-year, senior, secured revolving credit facility (the "Senior Credit Facility"). The Senior Credit Facility provides for a maximum of $900.0 million of revolving credit, including limited amounts of credit in the form of letters of credit and swingline loans. The Company paid financing costs of $8.3 million in connection with its Senior Credit Facility. These costs were deferred and, along with unamortized costs of $12.3 million related to the Company's prior senior, secured revolving credit facility, are being amortized over the term of the Senior Credit Facility.

On January 20, 2012, the Company entered into an amendment to the Senior Credit Facility that provides for an incremental term loan facility in the aggregate principal amount of $150.0 million. The Company paid financing costs of $1.0 million in connection with the amendment to its Senior Credit Facility. These costs were deferred and are being amortized over the remaining term of the Senior Credit Facility. The incremental term loan facility provides for eight scheduled quarterly principal payments of $1.875 million, with the first such payment due on June 30, 2012, followed by four scheduled quarterly principal payments of $3.750 million, with remaining quarterly principal payments of $5.625 million prior to maturity.

The Senior Credit Facility is scheduled to mature on July 8, 2016. The Company can terminate and prepay the Senior Credit Facility at any time without payment of any termination or prepayment penalty (other than customary breakage costs in respect of loans bearing interest at a rate based on LIBOR).

At the Company's election, revolving loans under the Senior Credit Facility bear interest at annual rates equal to either (a) LIBOR for 1-, 2-, 3- or 6- month periods, as selected by the Company, plus an applicable margin ranging between 1.25% and 2.0%, or (b) the higher of the Bank of America, N.A. prime rate, the Federal Funds rate plus 0.5%, and a monthly LIBOR rate plus 1.0%, plus an applicable margin ranging between 0.25% and 1.0%. The Company also pays a commitment fee to the lenders under the Senior Credit Facility on the average amount by which the aggregate commitments of the lenders exceed utilization of the Senior Credit Facility ranging from 0.25% to 0.4% per annum. The applicable margin and the commitment fee are determined based on the Company's Consolidated Net Leverage Ratio (with applicable margins and the commitment fee increasing as the ratio increases).

All obligations of the Company and the other borrowers under the Senior Credit Facility are required to be guaranteed by all of the Company's material domestic subsidiaries and all obligations of borrowers that are foreign subsidiaries are guaranteed by those foreign subsidiaries of the Company which the Company designates as guarantors.

Due to the rating agency upgrade announced on March 14, 2012 by Standard & Poor's Financial Services, LLC ("S&P"), the security interests in domestic accounts receivable and inventories, certain shares of capital stock (or . . .

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